'Lazy Portfolios' for stagflation 2008-2018!

What'll you do if this market trades sideways ... for 10 years?!

ARROYO GRANDE, Calif. (MarketWatch) -- Stagflation till 2018? I can hear you screaming: "Ten years of no growth? Plus inflation? Plus high volatility in a narrow trading range?" You're crazy!

Well, I was at Morgan Stanley during the 1970s, looked at billions of dollars of depressed real estate for clients. Stagflation lasted into the '80s, over 10 years. Painful stuff. On top of all this, in several recent columns we've reported on a bigger bubble blowing and a meltdown coming by 2011. Folks, the era of happy-days and happy-talk is over! See previous Paul B. Farrell.

Even if we don't get 10 years of bad news we know 2008 is already bad and getting worse. In his latest Insight Newsletter long-time economist and Forbes columnist Gary Shilling reminds us the U.S. recession is unfolding in four phases: "Two Underway, Two Just Starting." First two: The housing disaster and the Wall Street meltdown will continue at least through 2010. "Phase 3, a massive consumer retrenchment, the worst since the 1930s" is just kicking in. "By year's end, Phase 4 should start as falling U.S. consumer spending cuts the imports that fuel foreign growth."

So what's your best strategy? In 2008? Till 2018? Judging from the emails, confusion is rampant. The angry send hate-mail. Many put their heads in the sand. Others even think I'm too soft, expect the next meltdown is coming sooner. The latest news about Wall Street banks isn't helping. Gurus are clueless about the long term, praying they can stay alive trading short-term in a volatile narrow-band market.

How to invest in a 'bad' market?

"Our forecast is a lousy one for stocks and commodities, but a great for the dollar and Treasury bonds," says Shilling. But will you sell all you have and stick your nest egg in cash and gold? Or become an active trader. Probably not. If you're a passive investor like the vast majority, and you have a well-diversified portfolio, your best strategy may be to do nothing. Yep, sit tight rather than listen to endless bad advice from confused Street gurus. Most of us aren't good at market timing; the pros are worse.

Even a pro like Ted Aronson: Here are the reasons he'd "hold tight. The good include my faith in capitalism and its ability to weather a storm, even one of biblical proportions. The bad reason is, I have no faith in my ability to time this sort of thing. Even if I got out in time, I probably wouldn't be able to correctly time getting back in!" Aronson manages about $25 billion in institutional money but keeps his family money in his passive "Lazy Portfolio," and averaging an annual 16.37% return the past five years.

If you don't have a Lazy Portfolio now is the time to build your own using the eight models below. And remember, back in the bad old days of the 2000-2002 bear-recession, one of them, the Coffeehouse, was killing the S&P 500 by 15 percentage points each of the three years -- more proof passive investing beats action.

You also don't need a lot of funds with this strategy. That's important if you're young, new at the game or just don't have a lot of money to invest and can't afford to plunk down the $33,000 for the initial investments in an 11-fund portfolio.

So let's look at the smaller portfolios first to prove the point. Here's a comparison of the bottom lines of all eight Lazy Portfolios. Note that every one is beating the benchmark S&P 500 for all time periods:

Portfolio

Equity %

No. of funds

1-year return

3-year annualized return

5-year annualized return

Second Grader's Starter

90

3

-2.67%

11.06%

13.18%

Aronson Family Taxable

80

11

2.77

13.83

16.37

Yale U's Unconventional

70

6

-0.35

9.96

12.54

Margaritaville

67

3

2.78

10.80

12.42

FundAdvice Ultimate Buy & Hold

60

11

2.02

10.66

12.44

Dr. Bernstein's No-Brainer

75

4

-2.79

9.58

11.74

Dr. Bernstein's Smart Money

60

9

-1.79

8.57

10.57

Coffeehouse

60

7

-2.57

7.66

10.09

S&P 500

100

n/a

-6.70

7.57

9.77

Source: Morningstar Inc. Data as of June 2.

Second grader's starter portfolio

Got less than $10,000? Start with a portfolio like Kevin Roth's three-funder. Kevin put his together as an eight-year-old second-grader. He takes a long view and has 90% in equities. He beat the S&P 500 with average 13.18% returns over last five years.

Fund

Allocation

1-year return

3-year annualized return

5-year annualized return

Vanguard Total Stock Market Index

60%

-6.34%

8.20%

10.74%

Vanguard Total International Stock Index

30%

1.64

19.11

21.21

Vanguard Total Bond Market Index

10%

6.40

4.08

3.67

Portfolio

100%

-2.67

11.06

13.18

Margaritaville portfolio

Scott Burns, a popular Dallas Morning News columnist, has a three-fund portfolio that also beat the S&P 500 with average five-year returns of 13.18%. Scott's Margaritaville portfolio has a third each in foreign equities, domestic equities and inflation-protected securities. Real simple, no timing, just rebalance annually.

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